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Ceres 21st Century Utility July2010
Ceres 21st Century Utility July2010
Electric Utility
Positioning for
a Low-Carbon Future
July 2010
A Ceres Report
Authored by
Ceres is a national coalition of investors, environmental groups and other public interest
organizations working with companies to address sustainability challenges such as global
climate change. Ceres directs the Investor Network on Climate Risk, a group of more than
90 institutional investors and financial firms from the U.S. and Europe managing
approximately $10 trillion in assets.
Report Authors:
Forrest Small
Navigant Consulting
Lisa Frantzis
Navigant Consulting
Media Contact:
Peyton Fleming
Ceres
617-247-0700, ext. 120
fleming@ceres.org
Laverne Gosling
Navigant Consulting
202-481-7336
laverne.gosling@navigantconsulting.com
This report was made possible through support from the Bank of America Foundation and
the Surdna Foundation. The opinions expressed in this report are those of the authors and do
not necessarily reflect the views of the sponsors.
Ceres wishes to thank the many people who contributed to this report. Special thanks to
Rich Sedano of the Regulatory Assistance Project and Tim Woolf of the Massachusetts Dept.
of Public Utilities. Thanks also to the members of the Ceres team who provided valuable
insight and editing suggestions: Dan Mullen, Dan Bakal, Peyton Fleming, Meg Wilcox,
Andrea Moffat, Veena Ramani, and Meg Crawford.
Cave Dog Studio designed the final report.
July 2010
A Ceres Report
Authored by
iii
Executive Summary
The successful 21st century electric utility company will be very different from the utility
of the 20th century. To remain competitive, todays utility must respond to the risks and
opportunities from climate change, carbon costs, volatile fuel prices, emerging clean
technologies, expanding energy efficiency programs, increasing customer expectations and
competing third party energy providers. Responding to these challenges will require new core
competencies and revised business models for U.S. utilities.
iv
Historical
Emissions
Remainder
of U.S.
Economy
2050 = 83%
below 2005
(1,017 mmT CO2)
2
1
U.S. Electric
Sector
0
1990
2000
2010
2020
2030
2040
2050
Executive Summary
Clean energy resources available today will play a critical role in achieving CO2 reduction
targets. Energy efficiency and some renewable energy resources can reduce GHG
emissions cost-effectively, while maintaining electric system reliability and reducing
system-wide risk. However, deploying these clean energy resources at a large scale
presents fundamental challenges:
F
irst, most utilities lack sufficient regulatory support;
S
econd, the traditional utility business model is based on electricity sales which would be
eroded by energy efficiency and distributed clean energy resources; and
T
hird, the capabilities of the existing electricity delivery infrastructure may limit the
amount of clean energy resources that can be integrated without compromising reliability
or increasing cost excessively.
A utility that deals effectively with these trends, and receives sufficient support from regulators
and legislators, will be better positioned to succeed in the 21st century. All else equal, such
a utility is also more likely to attract lower cost capital, enabling it to earn stronger returns for
investors. On the other hand, a utility that fails to effectively manage risk, including higher
carbon exposure, may suffer greater financial impacts if climate legislation takes hold and
fossil generation costs rise.
Factor
20th Century
21st Century
Business Model
Electricity Demand
Increasing
Capacity Cost
Cost of Carbon
None
Utility Objectives
Passive
Table ES-1: Differences between the Utility Business in the 20th and 21st Centuries
1. Although new technologies have been introduced, long equipment lifecycles, standardization and utilities aversion
to risk have tended to limit the implementation of innovative transmission and distribution system technology.
2. New energy services such as powering electric vehicles may increase demand, but the net impact is
currently unclear.
3. The cost of new capacity will be partially offset as low carbon generating resources become commercially mature.
4. Investor owned utilities, in addition to managing costs, have the goal of earning market-based returns for
shareholders, while publicly owned utilities have the goal of minimizing cost for members.
Executive Summary
Key Elements of a 21st Century Utility Business Model
In addition to maintaining highly efficient business operations and effectively managing capital,
successful U.S. utilities in the 21st century will need to do several things well:
1. Manage carbon across the enterprise. With national climate and energy legislation under
consideration and a patchwork of state and regional carbon-reducing policies already in place,
it is expected that all utilities will have to deal with expected carbon controls in the future, and
probably within their system planning horizons. Utilities should account for carbon emission costs
in resource planning, and align those costs and risks with likely carbon-reduction scenarios.
Failing to effectively mitigate carbon risk will lead to higher shareholder and lender risks, as well
as unreasonably burdening ratepayers with higher costs. Investors and utility commissions will
be scrutinizing electricity supply portfolios more closely to evaluate impacts associated with new
climate regulations.
/kWh (2010$)
2. Pursue all cost-effective energy efficiency. Energy efficiency is among the least expensive
energy resources for utilities (Figure ES-2), and one of the most cost-effective ways to reduce
GHG emissions. As policymakers, regulators and utilities grapple with the challenge of achieving
steep emissions cuts, energy
efficiency is likely to emerge as
Levelized Cost of Electricity
18.0
the single most important energy
Notes:
Assumes Federal & state incentives.
16.0
resource for the 21st century power
CSP assumes trough technology.
16.5
Natural gas price of $4.57/MMBTU
14.0
sector. Studies show that energy
13.5
12.0
efficiency lowers consumer energy
10.0
bills, and implementing it becomes
9.5
9.5
8.0
less expensive as utilities use it more
7.5
6.0
widely. Because energy efficiency
6.0
6.0
4.0
reduces electricity sales, it has
4.5 3.5
2.0
not been fully adopted by most
2.5
3.0 2.0
0
utilities due to their rate structure
r
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being directly tied to consumption.
t
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as
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ati
However, supportive regulations
m
r
B
t
o
Bi
en
nc
Co
and ratemaking mechanisms
are making it more attractive for
Figure ES-2: Cost of EE as Compared to Other Resources
utilities to pursue cost-effective
Source: Navigant Consulting, Inc.
energy efficiency.
3. Integrate cost-effective renewable energy resources into the generation mix. The U.S. is
one of the strongest and most attractive renewable energy markets in the world. With continued
downward movement in production costs and prices, and upward pressures sustaining
or increasing fossil-generated power costs, simple operating economics are becoming an
increasingly powerful driver for renewables growth. The U.S. has seen substantial and promising
growth in large-scale wind and concentrating solar power (CSP) installations in recent years.
However, achieving Renewable Portfolio Standard (RPS) targets using only large-scale renewable
energy resources will be challenging due to the need for new transmission development which
emcompasses siting, permitting, environmental and cost constraints. For these reasons, a
growing number of states and utilities are pursuing expanded investment in distributed energy
vi
Executive Summary
resources (DER) such as solar photovoltaics (PV) (Figure ES-3). Recent analysis by Navigant
Consulting indicates that in some parts of the U.S. PV has the potential to achieve grid parity by
2015, or sooner depending on pricing and incentive levels.
4. Incorporate Smart Grid technologies for consumer and environmental benefit. Smart
Grid technologies, including smart metering, distribution automation and synchrophasor
monitoring are entering the mainstream, with most U.S. utilities involved in full-scale system
implementations or pilot programs.
An effective Smart Grid will help
RPS Policies
Solar carve-outs/compliance
reduce both peak electricity demand
Revenue
Opportunity to rate-base solar assets and leverage
and overall energy consumption. It
existing corporate functions
Opportunity
will integrate increasing amounts of
Federal ITC
Utilities can now use the 30% ITC through 2016
renewable energy and improve grid
Quick way to deploy RE, avoiding challenges
efficiency. It will also help utilities gain
Added Resource
related to transmission, interconnection, permitting
operational efficiencies and manage
3rd party solar service providers could lead
infrastructure and operating costs.
3rd Party Threat
to utility revenue erosion
Utilities should ensure that they
Brand Halo
Some utilities see solar as a way to create a brand halo
implement the Smart Grid in a manner
that maximizes consumer and clean
Potential FASB
Financial Accounting Standards Board may reclassify
energy benefits, including energy
Power Purchase Agreements (PPAs) as debt
Changes
efficiency and demand management,
Figure ES-3: Key Drivers of Utility Ownership of PV
and integration of renewable and
Source: Navigant Consulting, Inc.
distributed energy.
5. Conduct robust and transparent resource planning. Utilities should employ open and
transparent planning processes that consider the risks, probabilities, benefits, impacts and
applications of multiple energy resources under various scenarios. Planning processes should
include a full commitment by utilities to implement cost-effective energy efficiency and
renewable energy. Resource planning should involve greater stakeholder involvement on a
wider regional level and consider the full spectrum of energy efficiency and distributed energy
resources. Clear policy frameworks allow all parties to better understand the goals and regulatory
objectives that will influence or constrain the planning process. Finally, utilities should update
planning processes to reflect current and future costs for CO2, energy efficiency, distributed
energy resources, equipment and permitting.
Financial Implications
Building a clean energy supply and a Smart Grid infrastructure will require utilities to capitalize
hundreds of billions of dollars in rate base. Given that average retail electricity rates have
increased an average of 50 percent across all sectors over the past 10 years,5 increasing them
even more will be challenging. It is expected that regulators will be more comfortable approving
large-scale investments and their associated rate adjustments when the associated risks have
been clearly accounted for and managed. Protracted approval processes associated with
investments that are perceived by regulators to be unclear or questionable present a significant
financial risk to utilities. Some financial analysts are predicting that key credit metrics for utilities
5. U.S. Energy Information Administration
vii
Executive Summary
will be negatively impacted in the long term due to cost recovery risks from downward
rate pressure.
Key Regulatory Policies for the 21st Century Electric Power Sector
Mandatory regulatory policies will be needed to enable utilities to deploy the approaches and
technologies described in this report. These policies, which typically fall within the purview of
state governments and utility regulatory commissions, include:
Clean energy policies that set an overall direction aligning clean energy goals across
government agencies (including utility regulators); promote the development and
compatibility of complementary policies; and demonstrate a commitment to clean
energy resources;
Enforceable Renewable Portfolio Standards that incentivize compliance, provide clear
market signals for utilities, and reward those parties that deliver results;
Revenue decoupling to remove utilities inherent disincentive to implement large-scale
energy efficiency;
Effective net metering for distributed generation to facilitate consumer investment
in on-site renewable energy generation; and
Incentive ratemaking for utilities to provide premium returns on the right
utility investments.
Additionally, it is likely that the federal government will set policies that put a price on carbon and
increase energy independence, renewable energy and energy efficiency.
Conclusion
Utilities, whether investor owned or consumer owned, are public entities that build and operate
the electricity infrastructure that powers our nation and economy. They have an obligation to
serve customers in a way that minimizes financial and environmental risk. The ideas discussed
in this paper are based on two lynchpin principles that utilities should:
Minimize cost, risk, and environmental impact; and
Maximize opportunity, options, and societal benefit.
Utilities need to deploy capital in ways that provide affordable and secure electricity, while
meeting the nations climate objectives. Pursuing approaches that are overly capital-intensive
puts upward pressure on electricity rates and increases the risk of unfavorable recovery of cost.
This, in turn, could lower a utility's credit rating and increase its cost of capital. Utilities that
pursue diversified strategies utilizing cost-effective energy efficiency and distributed energy
resources are likely to reduce capital investment risk.
The most successful utilities will likely be those that pursue this agenda aggressively,
transparently, and across all aspects of the business. The inherent risk management benefits of
this approach are apt to be recognized by the financial institutions that rate and lend to electric
utilities. The ongoing support of credit rating agencies and financial institutions is crucial to
maintaining the momentum of capital into the ongoing transformation from a simple, regimented,
centralized commodity seller to a complex, diversified, innovative service provider.
viii
ix
Table of Contents
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
Key Report Recommendations for U.S. Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
I. Introduction: The Shifting Landscape of the 21st Century Power Sector . . . . . . . . . . . . . . . 1
Climate Change: A Major Challenge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Energy Security: A Growing National Priority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Customer Involvement: Leveraging Technology to Better Manage Energy Use . . . . . . . . . . 2
Grid Technology: Creating Greater Intelligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Electricity Demand: Multiple Factors Pushing it Down . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Renewable Energy: Gaining Share in the Supply Mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Natural Gas: An Increasingly Important Strategic Resource . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Coal: Facing an Array of Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Nuclear Power and Carbon Capture and Storage: Significant Uncertainties Remain . . . . 3
II. Five Key Elements of a 21st Century Utility Business Model . . . . . . . . . . . . . . . . . . . . . . . . . 5
1. Manage Carbon Across the Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2. Pursue All Cost-Effective Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3. Integrate Cost-Effective Renewable Energy Resources into the Generation Mix . . . . . . 16
4. Incorporate Smart Grid Technologies for Consumer and Environmental Benefit . . . . . 21
5. Conduct Robust and Transparent Resource Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
III. Financial Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
IV. Key State Regulatory Policies for the 21st Century Power Sector . . . . . . . . . . . . . . . . . . . 30
Clean Energy Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Enforceable Renewable Portfolio Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Revenue Decoupling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Effective Net Metering for Distributed Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Incentive Ratemaking for Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
I. Introduction:
The Shifting Landscape of the 21st Century Power Sector
Powerful trends are transforming the U.S. utility sector, including climate change, energy
security, and energy price volatility concerns; increasing deployment of alternative resources
like energy efficiency and renewable energy; and shifts in natural gas and other fossil fuel
industries. Utilities that respond most effectively to these key trends and whose regulators
and legislators support them in doing so will be best positioned to succeed in the 21st
century. Below are highlights of key drivers facing the industry.
I. Introduction:
The Shifting Landscape of the 21st Century Power Sector
Customer Involvement: Leveraging Technology
to Better Manage Energy Use
The energy industry, like most others, will continue to experience an evolution in customer
expectations, from information on demand to high degrees of control and engagement to
the ability to create collaborative and personalized interaction channels with energy service
providers. Experts increasingly mention customer involvement and the conversion of enduse load into an energy resource as one of the most transformative changes the industry
will undergo. The capability and complexity of loads, including smart appliances, energy
management systems, plug-in electric vehicles, and distributed energy resources, are
creating the opportunity to engage customers as active energy partners rather than passive
ratepayers. The expectation is that new energy products
will emerge, including service bundles, customized service
Defining the U.S. Electric
levels, and retail energy exchanges.
Utility Industry
I. Introduction:
The Shifting Landscape of the 21st Century Power Sector
Renewable Energy: Gaining Share in the Supply Mix
Renewable energy is benefiting from advancements on multiple fronts. State policies are
mandating it, technology advancements are increasing its performance, and manufacturing
scale and process improvements are driving down cost. While renewable energy is still a
relatively small portion of the overall energy resource mix, it has been a significant part of new
capacity additions in the U.S. in the last few years. This trend is expected to continue.
I. Introduction:
The Shifting Landscape of the 21st Century Power Sector
for such projects. While it is likely that some new nuclear plants will begin construction
and a small number of CCS pilots will be undertaken in the near term, it will be at least a
decade before utilities will be able to confidently pursue development of these resources
on a large scale.
Individually, each of these trends creates a degree of uncertainty for electric utilities and the
power sector. Combined, they signal a major shift in the landscape of the 21st century power
sector. The following report discusses what electric utilities can do to be successful in this
new environment.
Western Climate
Initiative (WCI)
Regional Greenhouse
Gas Initiative (RGGI)
MGGA Observers
RGGI Observers
WCI Observers
State Action
Team on Energy
and Climate
11. Uncovering the Full Renewable Energy Potential, renewable Energy World Conference & Expo, Navigant
Consulting Pre-Conference Workshop, March 2009.
12. C
alifornia Senate Bill 1368 prohibits the states utilities from taking new ownership interest in, or signing new
contracts of five years or longer for baseload generation with a CO2 emission rate exceeding that of a combinedcycle natural gas unit. Washington Senate Bill 6001 includes similar restrictions. Montana House Bill 25 prohibits
the state PUC from approving a utility application to lease/acquire an equity interest in a coal plan constructed
post-2006, unless it has at least 50 percent capture and storage of CO2, and requires use of cost-effective carbon
offsets if leasing/acquiring an equity interest in a power plant fueled by natural or synthetic gas and constructed
after 2006. Oregon HB 3283 requires that new baseload gas generation and new non-baseload generation
mitigate projected CO2 emissions in excess of a specified level. Washington HB 3141 is similar.
Allowances
Offsets
Interaction with
Existing Systems
Old Situation
Market Drivers
and Constraints
Regulatory
Requirements
New plant construction is
driven by load growth. Weak RPS
requirements and no carbon
costs marginalize the need to
diversify into clean energy.
Generation Level
and Fuel Mix
of Portfolio
Portfolio mix is
predominantly driven by
available lowest fuel costs.
New Situation
How carbon costs are recovered, and the resultant
financial impact, can impact portfolio choices
Resources availability, grid integration and
transmission issues for renewables can have varying
financial impacts, influencing portfolio choices
Time lags between load growth
and renewable mandates could result
in over capacity, impacting finances
Market Drivers
and Constraints
Regulatory
Requirements
Generation Level
and Fuel Mix
of Portfolio
Financial Impacts
of Portfolio Choices
Financial Impacts
of Portfolio Choices
16. The Greenhouse Gas Protocol (GHG Protocol) is an international accounting tool for government and business
leaders to understand, quantify, and manage greenhouse gas emissions. The GHG Protocol is a decade-long
partnership between the World Resources Institute (WRI) and the World Business Council for Sustainable
Development (WBCSD). www.ghgprotocol.org.
M
ake an overall corporate commitment to minimize
carbon emissions as a central guiding policy;
2. H
elp customers and communities reduce
their emissions
P
erform rigorous scenario analysis that assumes a
range of carbon costs;
3. O
ffer more low-carbon electricity in the
marketplace
S
et a meaningful GHG reduction target that will help
prepare the company for future regulation; and
Disclose relevant data and plans thoroughly to stakeholders.
17. Impact of Energy Efficiency and Demand Response on Electricity Demand, Perspectives on a Realistic United
States Electric Power Generation Portfolio: 2010 to 2050, Lisa Wood, Executive Director, Institute for Electric
Efficiency, October 26, 2009.
18. Energy Efficiency as a Low-Cost Resource for Achieving Carbon Emissions Reductions, National Action Plan on
Energy Efficiency, September 2009.
10
18.0
16.0
16.5
/kWh (2010$)
14.0
12.0
10.0
9.5
9.5
8.0
7.5
6.0
4.5
2.0
erg
3.5
2.5
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6.0
4.0
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Some states have been implementing successful EE measures for years. The State Energy
Efficiency Scorecard produced by the American Council for an Energy Efficient Economy
(ACEEE) ranks states in six categories related to energy efficiency. Table 2 shows the top
10 states as ranked according to ACEEEs six categories, along with their associated electricity
savings. As shown in the table, leading states have been able to achieve EE savings of
1 percent or more of electricity sales per year.
Top Ten States Based On ACEEEs State Energy Efficiency Scorecard
2009 Rank (2008 savings*)
1. California (1.3%)
2. Massachusetts (0.86%)
3. Connecticut (1.1%)
4. Oregon (0.90%)
5. New York (0.36%)
6. Vermont (1.8%)
7. Washington (0.74%)
8. Minnesota (0.68%)
9. Rhode Island (0.81%)
10. Maine (0.91%)
1. California (1.3%)
2. Oregon (0.90%)
3. Connecticut (1.1%)
4. Vermont (1.8%)
5. New York (0.36%)
6. Washington (0.74%)
7. Massachusetts (0.86%) & Minnesota (0.68%) (tie)
9. Wisconsin (0.66%)
10. New Jersey (0.30%)
11
1.6%
$0.040
1.4%
$0.035
1.2%
$0.030
1.0%
$0.025
0.8%
$0.020
0.6%
$0.015
0.4%
$0.010
0.2%
$0.005
0.0%
$0.000
010%
1020%
2030%
3040%
4050%
Rates without
Energy Efficiency
$65
Analysis by Navigant Consulting indicates that the utility EE programs that achieve the highest
levels of energy savings also deliver EE at the lowest cost, suggesting that energy efficiency
becomes less expensive as utilities use it more widely (Figure 5). After ranking utility EE
programs in deciles based on 2007 electricity savings, Navigant Consulting looked the top five
deciles and compared how much
energy was saved with how much it
Electricity rates may go up
but customer electric bills go down.
$80
$100
cost utilities to save it. The top decile
of utilities saved energy equal to
Bills without
$90
$75
1.4 percent of their sales at an
Energy Efficiency
Rates with
Energy Efficiency
average utility19 levelized cost of
$80
$70
less than 2 cents per kWh saved.
Bills with
Energy Efficiency
$70
$60
$60
2005
2015
2020
2025
2030
2005
2015
2025
19. U
tility cost of energy saved includes the utility program management and administration costs and the incentives
provided to customers. The incentives often cover only a portion of the total cost of the measure.
12
2020
2030
13
25. R
egulatory Assistance Project, Revenue Decoupling: Standards and Criteria, Report to the Minnesota Public
Utilities Commission, 30 June 2008.
26. N
ational Action Plan on Energy Efficiency, Aligning Utility Incentives with Investment in Energy Efficiency,
November 2007.
14
Program Cost
Recovery
Lost Margin
Recovery
Margin
Decoupling
Capitalize
Rate case
deferral
Performance
payment
Performance
Incentives
Shared savings
ROR adder
15
Increasing
Grid Prices
/ kWh (2010$)
/ kWh (2010$)
CS
PV
me
Co
al
rci
as
m
Bio
on
ind
sti
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mb
Co
Cla
W
s4
al
rm
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oth
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Ga
an
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ma
Bio
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CC
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ie
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En
(1) High insolation (2) High Insolation (e.g. Southern California) and 2010 PV installed system price of $4.15/Wpdc;
Note: All cost estimates exclude additional revenue from renewable energy certificates. (3) GTCC = $.06/kWh and Coal Steam
Turbine = $.075/kWh in year 2010 and GTCC = $.071$.085/kWh and Coal = $.089$.11/kWh in 2017 for $4.57 & $6/MMBTU
(Gas), respectively and $1 and $3/MMBTU (Coal), respectively. A $20/ton CO2 results in ~.0075 & $.02/kWh incremental cost for
GTCC and Coal, respectively.
27. Basic Principles of Wind Resource Evaluation, American Wind Energy Association,
http://www.awea.org/faq/basicwr.html
28. AWEA U.S. Wind Industry Annual Market Report, Year Ending 2009.
16
15% by 2025
ND
CA
33% by 2020
NH
23.8% by 2025
CO
NJ
22.5% by 2021
CT
23% by 2020
NM
DC
20% by 2020
NV
25% by 2025
DE
20% by 2019
NY
24% by 2013
HI
40% by 2030
OH
25% by 2025
IA
OR
IL
25% by 2025
PA
18% in 2020
KS
20% by 2020
RI
16% by 2020
MA1
SD
MD
20% by 2022
TX
5,880 MW by 2015
ME2
UT
MI
VA
MN
VT
MO
15% by 2021
WA
15% by 2020
MT
15% by 2015
WI
10% by 2015
NC
WV
Source: January 2010, Database of State Incentives for Renewable Energy (DSIRE)
(20102015 $B)
35
(20102015 MW)
12,000
10,000
8,000
6,000
4,000
2,000
0
30
25
20
15
10
5
0
2010
2011
2012
Hydro
2013
2014
Geothermal
2015
Landfill gas
2010
2011
Biomass
2012
Solar
2013
2014
2015
Wind
Forecasts assume 1) no renewal of existing federal tax credits after their current expiration dates and
2) no new federal stimulus program is created.
29. New Nuclear Generation: Ratings Pressure Increasing, Moodys Global Infrastructure Finance, June 2009
30. Lester Brown, Coal-Fired Power on the Way Out?, 24 Feb 2010. http://ipsnews.net/news.asp?idnews=50449.
17
Proposed 4Q 2008
5MW
18
Conse
Aggre
ssive
18
/kWh
rvativ
Likely
20
16
Aggressive
14
Likely
12
Conservative
10
8
2010
2012
2014
2016
2018
2020
PV cost/performance typical for the Northeast US; Debt 8% equity 10% (80:20), 10 yrs debt, 25 yr lifetime, 30% ITC (assumed
beyond 2016); includes state incentives; 2010 electricity costs are typical for Northeast states with EIA electricity escalation rates.
Utility Ownership of PV
Earlier this year, Southern California Edison (SCE) received approval by
the California Public Utilities Commission to build and own up to 250
MW of solar PV capacity and to execute contracts for up to 250 MW for
generation from similar facilities owned and maintained by Independent
Power Producers (IPP) through a competitive solicitation process.
Motivation for the program includes:
RPS compliance without additional transmission construction;
Helps to reduce system load peaks; and
Fills a gap in the California Solar Initiative program that
targets applications less than 1 MW and an RPS that targets
multi-MW systems.
Target locations for PV installation include large commercial, institutional,
and industrial rooftops sufficient to support 12MW installations.
Up to 10 percent of the systems will be ground mounted. SCE will own
50 percent of the installed PV, and 50 percent will be customer owned.
Customer owned systems will be determined through a competitive bid
with 20 year Power Purchase Agreements.
The program is limited to 500 MW of PV at cost cap of $963 million.
IPP bids will be capped at $260/MWh. Funding for the program will
come from SCE ratepayers, including 100 percent of reasonable startup
costs. SCE can recover capital costs up to $3.85 per watt without review
by the CPUC.
31. Grid parity is the point at which the cost of electricity produced by PV is equal to or cheaper than the price of
electricity purchased from the utility.
19
Utility companies that meet growing customer demand by offering PV products and services
(as well as other distributed energy resources and energy efficiency offerings) have a significant
business opportunity. They have tremendous potential to expand service offerings across an
exciting and fast growing business sector, while protecting their existing relationships with some of
the most attractive members of their customer base.
In summary, to expand renewable energy, utilities should:
A
ctively pursue development of a range of renewable energy projects to meet and/or
exceed state renewable targets;
C
onsider owning PV assets to gain experience in their implementation given the potential
near-term grid parity and possible threat of third party providers serving utility customers
solar power;
E
valuate business models being used by private competitors and other utility companies to
own distributed energy resources and other renewable assets; and
C
reate new risk hedging and grid management mechanisms to deal with variance in
customer load response, and intermittent renewable energy resources.
32. N
STAR completes 600th energy audit in Marshfield. Mon Nov 24, 2008. http://www.wickedlocal.com/marshfield/
homepage/x541355162/NSTAR-completes-600th-energy-audit-in-Marshfield
20
20,000
Rooftop PV Penetration
without Smart Grid
Rooftop PV with Smart Grid
16,000
MWpDC
12,000
8,000
4,000
0
2010
2015
2020
Results based on Navigant Consulting PV Market Penetration Model and Low PV System Pricing. For the Rooftop PV with Smart
Grid case Navigant Consulting assumes that because key technical barriers are addressed (voltage regulation, reverse power flow
and power fluctuations/frequency regulation), that the some of the constraints on PV are relaxed and economics are improved.
21
33. The Convergence of the Smart Grid with Photovoltaics: Identifying Value and Opportunities, Navigant
Consulting, January 2009.
22
Legislature
Commission
Environmental
Regulators
Financial
Community
Policy Framework
Energy planning has become extremely complex. Rate impacts, environmental impacts,
water scarcity, siting and equipment and construction lead times are among of the many
issues that utilities struggle with as they develop energy infrastructure plans and try to
implement them. Dealing with these issues and the stakeholders that care about them
can cause schedule delays and
increase costs. Collectively these
Society
Customers
Stakeholders / Influencers
factors increase project risks and
Key Process Inputs
can undermine utility credit quality,
Utilities
Stakeholder Input
particularly when the projects are
Process Output
very large and/or controversial.
Integrated
Planning Process
Robust and
Transparent Plan
Robust Scenarios
t&OFSHZ4VQQMZ
t%FMJWFSZ*OGSBTUSVDUVSF
t$VTUPNFS1SPHSBNT
Utility
Utility Investments
Energy Suppliers
(Central, DER)
23
24
100%
80%
60%
40%
20%
0%
Utilities are grappling with several issues simultaneously, each of which will have major
financial impacts. Accounting for the cost of carbon could significantly increase resource
costs for some utilities that have
large portions of carbon-heavy
S&P Credit Ratings Distribution, Electric Utilities
generation in their resource mixes.
However, utilities are also faced with
massive reinvestment in the existing
delivery infrastructure at the same
A or higher
A
they are implementing the Smart
BBB+
Grid and its associated technologies.
BBB
All of this will require a very large,
BBB or below
diverse long- term investment
Below BBB
program that will have significant
effects on revenue requirements and
rate bases.
In the past, utilities were well known
as low risk investments, with the
Figure 18: Long-Term Decline in Credit Quality
majority having S&P credit ratings
(S&P Credit Ratings, Electric Utilities)
of A or higher. This meant that they
Sources: Wall Street Turmoil: Impacts on Electric Utilities, Richard McMahon, Jr.,
Edison Electric Institute, NARUC Winter Committee Meetings, February 17, 2009;
were positioned to attract large
and Q3 2009 Financial Update, Credit Ratings, Edison Electric Institute.
amounts of capital at very attractive
rates that allowed them to build
large power plants and transmission lines while managing the cost to customers. Today, the
average credit rating for the industry has slipped to BBB (Figure 18), increasing utilities cost
of debt and the overall cost of financing the transition to a cleaner power sector.
4/16/1992
100
80
60
40
20
9/30/2009
Over the last five years, annual capital expenditures by U.S. shareholder-owned utilities have
almost doubled to over $84 billion
Capital Expenditures ($ Billions)
Cash from Operations CapEx ($ Billions)
per year (Figure 19). At this rate,
U.S. Shareholder-Owned Electric Utilities
U.S. Shareholder-Owned Electric Utilities
these utilities could invest almost
30
$1 trillion in capital over the next
84.2
20
17.0
10 years in generation, transmission
74.1
14.0
and distribution assets. An outcome
9.6
10
59.9
of this increase in capital spending
1.9
(CapEx) has been a reduction in
48.4
0
43.0
41.1
cash flow (cash from operations
(10)
(7.5)
minus CapEx). As utilities continue
to pursue large capital investment
(20)
programs, they must be able to
(20.9)
ensure that the investments are
(30)
2003 2004 2005 2006 2007 2008
2003 2004 2005 2006 2007 2008
allowed into their rate base by
state utility commissions to support
Figure 19: CapEx and Impacts on Cash Flow
revenue requirements. Otherwise,
Source: Edison Electric Institute
the utilities will incur financing costs
25
14
10
Residential
12
Commercial
Industrial
All Sectors
/kWh
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
The regulatory approval process for large-scale investment decisions presents a significant
risk to utilities in the long term. Pursuing approaches that are overly capital-intensive puts
upward pressure on electricity rates and increases the risk of unfavorable recovery of cost.
This, in turn, could lower a utility's credit rating and increase its cost of capital. Some financial
analysts are predicting that key credit metrics for utilities will be negatively impacted in the
long term due to cost recovery risks from downward rate pressure.34 Utilities that pursue
diversified strategies utilizing cost-effective energy efficiency and distributed energy resources
are likely to reduce capital investment risk.
Along with a resistance to increasing rates, the economic recession has resulted in significant
reductions in electricity demand across the country, particularly in the industrial sector. This
reduction translated to dramatic decreases in retail sales revenue for utilities, and forced
many utilities to make sizable cutbacks in capital budgets and operating expenses. All of this
demonstrated the potential long-term impact of declines in electricity consumption under a
scenario where utility revenues remain tied to kilowatt-hour sales.
Recent reductions of customer demand highlight the inherent conflict most utilities have with
fully embracing energy efficiency. Similar effects would be felt from widespread adoption of
customer owned or sited generation such as distributed PV, or any other resources that
would tend to lower energy sales by utilities. These clean energy resources could end up
having a significant negative impact on utility credit quality to the extent that they erode
retail electricity sales. This effect will be compounded if utilities are also forced to enhance
electricity delivery infrastructure and grid operations to manage high penetrations of
distributed energy resources.
34. M
oodys Investors Service, Annual Outlook: U.S. Electric Utilities Face Challenges Beyond Near-Term,
January 2010.
26
21st Century
Business Model
Business Model
C
omplex, integrated energy services serving
diverse and evolving customer needs with an
information-enabled infrastructure
Sources of Revenue
Sources of Revenue
P
ower plant capital expenditures, primarily for
natural gas and large scale renewables plants,
upgrades to fleet, also some coal w/CCS and
nuclear
T
ransmission capital expenditures
R
ecovery of fixed and variable costs for electricity
delivery under a revenue decoupling approach
A
ggressive energy efficiency programs in most
states with financial incentives for performance
E
ffectively deployed Smart Grid technology and
services, including smart meters, energy storage,
vehicle charging, etc.
U
tility-owned distributed renewables
27
38. S
tandard & Poors, The Potential Credit Impact Of Carbon Cap-And-Trade Legislation On U.S. Companies,
Sept. 14, 2009.
28
29
39. N
atural gas fired generation is an attractive resource for significantly reducing CO2 emissions in the near term,
while at the same time being domestically available for the foreseeable future. 84 percent of the natural gas
consumed in the US is produced domestically, with the remainder largely supplied from Canada. Domestic
supplies have surged in recent years, with recent studies indicating that, even with a 50 percent increase
in demand, natural gas would be available for 80 years. The location of natural gas supplies as an on-shore
resource accessible by load centers is also attractive from an energy security perspective. For example, Marcellus
shale gas in western Pennsylvania is close to load centers of PJM Interconnection.
30
31
No Decoupling (31)
32
40. National Action Plan on Energy Efficiency, Aligning Utility Incentives with Investment in Energy Efficiency,
November 2007.
41. Network for New Energy Choices, Freeing the Grid: Best and Worst Practices in State Net Metering Policies
and Interconnection Procedures, November 2009.
33
34